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Now's the Time to Buy Precious Metals

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The precious metals complex is extremely oversold and nearing strong support. This coincides with extremely negative sentiment, which is bullish from a contrary perspective.

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Since the end of December 2012 my firm has been writing about the coming bottom in precious metals. Our forecast for 2013 was to see a low in Q1 and then continued consolidation until the end of the summer in which gold could be in good position to break $1800. That forecast remains largely intact, although it appears the mining stocks will bottom quite a bit lower than we thought two months ago, and even five months ago. Three weeks ago we noted that a potential final bottom was on the way. After beating around the bush, we are ready to say that now is the time to begin buying, and we'll show you why.

Technicals

A few weeks ago we noted this major trendline support for the gold stocks. The market is about 6% from this major trendline which also coincides with the 62% retracement of the 2008 to 2011 cyclical bull.



Let's zoom in on the short-term for Market Vectors Gold Miners ETF (NYSEARCA:GDX) as we prefer it to the NYSE Gold Bugs Index (INDEXNYSEGISS:HUI) above. We already know the major support trendline (for the sector) is nearby. The sector is approaching that support in an extreme oversold condition. GDX has shed 31% in the past five months and 18% in just 21 days. Moreover, note the three open gaps and how they've occurred following an already substantial decline. Hence, these gaps are a reflection of emotion which leads to panic. If we see a final gap then it is likely to be an exhaustion gap which would signal a reversal is imminent.



For gold and silver I show weekly candle charts as they give us an idea of the bigger picture. That picture is one of long consolidation after significant gains following the 2008 low. Recall the price action from 2009 to the 2011 peaks. Gold gained from $950 in the summer of 2009 to a peak of $1923 in the summer of 2011. In the same period silver went from $13 to $49. Folks, these are massive moves that take time to be digested. By "time" I mean quarters to years, not weeks or months. As we sometimes try to decipher every wiggle, it's easy to forget that point.

Turning back to the present, pay attention to how the metals close this week and the next few weeks. There is major support at these levels and we expect to see the metals hold the ranges denoted on the chart.



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No positions in stocks mentioned.

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